Darling Today, Nemesis Tomorrow

In many companies a multi-tiered distribution system (Brand – Distributor – Dealers) has a holy reverence.
Some think of it as a competitive advantage while others consider it a core competency where entry barrier for a new entrant is huge as the channel is built over time.

However, the early benefits that quickly come with having
a multi-tiered channel distribution system can quickly degenerate into a complex array of sales and distribution challenges. Especially when the management is only focusing on one benchmark – sales.

Appointing Distributors

At the first level is the company appointed distributor. For a new company or brand starting out finding the right distributor is a challenge especially in domains where the company has no locus standi or there are other stronger competitors.

Companies therefore resort to finding one or two distributors in key markets who are willing to buy into their company policies and then supplement these distributors with down chain systems. Often the deciding factor is the payment policies of the company that become key deciding factors. A company that has a strict ‘payment first’ policy is unlikely to find many early buyers into becoming a distributor.

Official policy is usually to appoint distributor who has two main assets, Channel Reach and Financial Capabilities/worthiness.

Those that are unwilling to commit either payments or orders but have a good channel reach are quickly subverted into becoming a 2nd Tier partner to the main distributor often called sub distributors. The main distributor is often willing to extend credit and this becomes a deciding factor in bringing on board channel partners at the downstream levels. The chain continues as companies try to expand themselves into smaller and smaller markets. Credit & Stocking Terms become the sole reason to add on distribution tiers in the downstream.

Appointing 2nd Tier and 3rd Tier distribution partners lead to immediate boost in distribution and placement in retail stores. Coupled with the un-official ‘Dealer’ channel that is often used by Distributors with a blind eye from company sales team give further boost to meeting monthly and quarterly sales target.

In reality, the Channel Reach and Financial Capabilities are often de-coupled. The Distributor performs the financial functions while the Sub-distributor manages the channel reach function.

The Darling Syndrome

The darlings of this channel are the newly created (not appointed, unofficial) Sub Distributors. For a new brand or a brand looking to rapidly expand its distribution territory, a multi-tiered system has several clear benefits.

You’re able to push larger stocks down the line through your distributor and meet company sales targets.

You’re able to protect the company’s ‘payment terms’ through your primary distributor. Your primary distributor largely carries the risk of non-payment while you are able to push your stocks into the channel

Your ‘un-official’ dealer channel is able to reach out to marginal retailers who otherwise would not be serviced or supplied to by your distribution channel due to the low stock lifts that marginal retailers do.

Overall as can be seen above, having such a distribution channel can be a powerful aphrodisiac for those in channel management. Fast sales growth, rapid geography expansion, higher stock lifts- Who would not love to want all of this??

Transformation to Nemesis

Fast Forward a few years down the line and one typically encounters several minor and major issues in a multi-tiered distribution system. What seemed an aphrodisiac initially suddenly turns into a huge pain.

Vagaries in Sales You begin to find anomalies in sales. Your distributor sales are no longer consistent. There are large variations in his monthly stock lifts. You initially counter this with providing back end discounts to the distributor and the problem abates. But it comes back with a bang a few months down the line.

If one digs deeper into the distributor sales, one would discover that the vagaries are largely being caused by the sub- distributors (darlings) that the brand you helped set up initially. This is the impact of the times when all eyes were on ONLY sales numbers not so much on where these numbers were coming from. These sub-distributors (darlings) are not tied in with any brand – another competitor offers a better scheme and they shift immediately.

One begins to experience problems in sales forecasting. How can you forecast for sales when you’re not in control?

The inability to determine where the sales are coming from means we don’t have visibility about the stock. Where does marketing send its customers?Who are the dealers that need to be trained? Where should I send marketing collaterals?

Better visibility helps in better planning. Unfortunately, this is not possible in a low visibility system.

The third headache area is off-course the inability to adequately control the product mix sales. Down lines in a multi-tier channel system will typically only pick up SKU’s that they believe they will be able to liquidate quickly.

Sales Team becomes lazy – instead of going to multiple counters to establish, maintain and manage the sell out from the distributor’s end a smart alec sales guy goes to the sub-distributor’s office only. And the brand rewards such a sales guy because he has the ‘sales numbers’ and the brand is only looking at those.

The biggest problem, of course, is that in a multi-tier system is that often the sub-distributor channel often offloads stocks into the market at prices below that of the official distributor. (because he has taken the benefit of the higher slab on the scheme that you launched). It leads to dealers picking up stocks from the sub-distributors rather than the distributor. In effect your dealers can get better prices from the market as compared to from your own distributor. This leads to relationship problems between the various channels and ultimately defeats the very purpose of setting up such a channel.

How do you solve this quagmire?

There is no escaping the fact that having a multi-tiered channel distribution system helps brands leverage their distribution across a much wider and deeper territory. The trick is in managing this intricate network effectively by engaging with the various channels from the start to avoid the later year problems.

At Triad, we consult and support brands in managing this complex network through three key routes:

Managing the channel through effective channel loyalty program. Creating multi-tiered channel loyalty programs and implementing them effectively is one way to begin a relationship program that engages with 2nd and 3rd Tier channels.

Create and implement sales incentive programs carefully based on each channel dynamic rather than simply giving away a back-end discount. As part of this incentive, involving the retailer into the scheme is critical both from a relationship as well as sales perspective.

Managing channels can be complex and challenging unless managed effectively. While there is no right or wrong way in setting up a channel system, there are definitely right and wrong ways of managing the channel from a long term perspective. And this is where agencies like Triad come into play.